Although you may not have guessed it judging by the recent performance of the S&P/ASX 200 Index (ASX: XJO), the economy is about to enter a significant recession. Which means that – in a rational world – another ASX 200 correction could be on the horizon. And whether or not you think we live in a rational world, the jury seems to still be out on that one. However, surely we can all agree that it wouldn’t hurt to start protecting your portfolio against short-term volatility in the share market.
So, with that in mind, here are 3 ASX 200 financial services companies with diverse income streams. These have the possibility of providing your portfolio with downside risk protection coupled with strong, long-term growth potential.
Bravura Solutions Ltd (ASX: BVS)
Bravura Solutions is a software company specialising in wealth management, financial services and funds administration. Its flagship product is Sonata, a scalable software solution for the wealth management industry. The company has grown rapidly over the last few years and now also has a full suite of products supporting the insurance and superannuation industries as well as other areas of the financial sector.
In the last year alone, Bravura has acquired financial planning software company Midwinter, as well as wealth management company FinoComp. The company’s first half FY20 net profit after tax (NPAT) surged 21% higher against 1H19 to $19.8 million. Furthermore, 78% of its total revenues were from recurring sources. Bravura expects its full year NPAT growth rate to be in the mid-teens.
Despite sliding 5.6% lower last week to $4.58, Bravura shares have risen to $4.71 in morning trade today. The Bravura share price has also held up surprisingly well during the coronavirus pandemic. After dropping to an intraday low of $2.92 on 23 March, Bravura shares have since recovered a significant portion of those losses. However, they are still trading well short of the $5.98, 52-week high they reached back in February.
Challenger Ltd (ASX: CGF)
ASX 200 investment management company Challenger is Australia’s largest provider of annuities. Challenger supports individuals throughout retirement by providing products that deliver stable income streams. Volatility in the financial markets caused by the coronavirus pandemic could potentially increase demand for the stability of fixed annuity products. However this also has the potential to hurt Challenger’s funds management business.
This was reflected in Challenger’s performance for the March quarter, which was a bit of a mixed bag. Sales were buoyed by an uptick in the Japanese and Institutional markets. But total assets fell 8% to $79 billion due to the broad market selloff that occurred back in March. Despite this, Challenger still reaffirmed its full year guidance for normalised net profit after tax of between $500 million and $550 million. This would represent year-on-year growth of between 26% and 39%.
Given the fact that Challenger shares are still currently trading at nearly 50% off their pre-coronavirus highs, they could offer a great – if speculative – ASX 200 investment opportunity for new shareholders.
ASX Ltd (ASX:ASX)
Despite a topsy-turvy year for the ASX 200, the share price of the market operator has climbed to new highs. After sliding to a low of $63.02 in mid-March, ASX shares have rebounded strongly. Last week, they even briefly touched a new 52-week high of $89.92.
Although new IPOs have dropped significantly over the last few months, secondary capital raisings have skyrocketed as companies seek to strengthen their balance sheets. For May, secondary capital raisings were up 151% versus May 2019 to a little over $7.5 billion. Trading activity has also been increasing, with the average daily value traded on the market for May up 33% versus the prior comparative period.
The fact that the total number of listed entities on the ASX is declining (down to 2,195 from 2,266 as at May 2019) is a concern for the operator. But it benefits from the income generated by facilitating higher trading volumes and capital raisings.
With the potential for more market volatility around the corner as Australia enters its first recession in 29 years, another correction in the ASX share price could be looming. However, it has proved itself to be a surprisingly defensive stock to have in your portfolio throughout the coronavirus crisis.
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Rhys Brock owns shares of Bravura Solutions Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Bravura Solutions Ltd. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia has recommended Bravura Solutions Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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